Taking a closer look at the full costs of energy acquisition and dissipation

Wednesday, February 16, 2011

Here are two articles from resources for the future looking at the link between certification and environmental outcomes. We will not discuss them in class, as I would like to use tomorrow's class time to review for the midterm. However, if you would like to talk about these outside of class I am happy to do so anytime.

7 comments:

I thought it was interesting that this study excluded previous studies that examined consumer demand for certified products. This seems to be an integral factor in how effective the certification program is because for the farmers to gain profits once certified there has to be a demand for those products. People must be willing to pay enough for the certified products to cover the costs of the change in farming practices in order to increase the demand distributors must use a pull marketing strategy, marketing to consumers rather than retailers. Any effective efforts to market to consumers will increase demand for the products and thus allow the certification program to be effective as well. An increase in demand could also be correlated with an increase in the positive effects of the program.

It is interesting that economic analysis is moving towards a scientific approach. The inclusion of a counterfactual or control group allows for a more robust analysis, and lets the researcher better gage the effects of the program under consideration. In cases such as conditional cash transfers, it is plausible to implement this design. In Mexico the Progresa program was offered to some villages and not others, but data was gathered from both.

If data can be gathered efficiently on the performance of certified sustainable products/companies versus non-certified companies then the effectiveness can be measured more accurately. There may however be cases where forming a control group and gathering data is difficult or infeasible. There are also ethical considerations in terms of offering aid to some groups and not others. In the case of sustainable programs, the ethical issue is lessened, but when implementing conditional cash transfers, offering some villages aid while ignoring others, is questionably ethical.

Sustainable certification initiatives, such as the Sustainable Forestry Initiative (SFI), serve in two parts: creating incentives for farms and firms to improve upon environmental and socioeconomic performance while helping consumers identify exactly what they are buying (products from a certified source, backed by a rigorous 3rd party certification audit. These 3rd party audits must be stringent enough to exclude producers who fail to meet those sustainable standards while still offsetting costs enough to attract participants. The article suggests that little is known still about whether these certification initiatives actually affect environmental/socioeconomic performance for few studies have evaluated their actual impact. Most concerning to me is that there is little evidence that certification has had a significant impact on behaviors in forestry/timber production. While certified firms may be more likely to adopt sustainable management practices than an un-certified operation, this has not been correlated with any actual improvement in conservation outcomes and large scale deforestation has not been reduced by these efforts. Certification is evidently providing little to no price premiums. While this may be troubling, the authors conclude that perhaps some of the “benefits” of certification were already being realized through community forestry management. Perhaps before initiating certification efforts, resources would be best placed in educational efforts to communities whose economy relies on timber production to enable them to understand the benefits that certification initiatives are trying to encourage. This will only be possible in countries with the governance capacity in the forestry sector.

Both articles discuss the level of positive effects gained from organic certification; the first article focuses on the socioeconomic and environmental benefits of mainly bananas, coffee and tourism certifications, whereas the second article focuses only on environmental benefits of organic coffee certifications. Unfortunately the first article laments a rather extreme lack of evidence. Only 14 of the 37 studies utilized "constructed a reasonably credible counterfactual", and, of those 14 only 6 studies showed a positive impact from certification. Furthermore, of those 6 studies, only 1 study gave evidence of a positive environmental impact. Due to the lack of evidence available from the limited number of usable studies, it is impossible to conclude if certification has a positive impact for farms and firms. Fortunately the article ends with several possible ways to improve these insufficient results. Clearly much more time and many more resources need to be devoted to this research.

The second article tells a different and more encouraging tale. In this article there are more than 2,600 farms that were able to provide data for the research- a much more feasible number for reliable evaluation and evidence. Unlike the results of the last article, this paper claims that the research demonstrated "that certification reduces all of the 3 chemical inputs" that data is available for. In addition, the study found that certification "increases adoption of at least one of the four environmentally friendly management practices" for which the study had data for. Overall the results show that there is potential for substantial positive environmental benefit in the certification process. This suggests that more work and resources should be placed into implementing certification in other industries (such as bananas and tourism) because better results than were originally found are possible for positive environmental impact.

Sustainable certificates seem to be a good way to create financial incentives for farms and firms to use more sustainable/environmental friendly practices. However, there is not enough evidence for the various sectors of agriculture to know if there are actual benefits. Certain areas, types of certification, and impacts on ecological services are being ignored. The specific goals of certification projects need to be explicitly stated in order accurate evaluations to be made. As mentioned above, the scientific approach to the certificate programs would allow more concrete evidence to determine a counterfactual outcome.

But the main problem is finding a reliable, cost-effective way to monitor practices and to ensure that the eco-friendly producer are still able to make a profit. There is adequate data for the coffee farms in Costa Rica to suggest that certifications do reduce the amount of chemicals used in production. This is a change in management practices but there is still no concrete evidence for certificates causes greater ecological services.

The econometric model that Blackman and Naranjo used in the Eco-Certificate on Environmental Benefits is very interesting. The authors were able to contain for the self-selection bias, so that the requirement of "additionality" is measured directly (as suggested by Pattanayak's paper) and the problem of spillage is minimized. The usage of propensity scores to match similar characteristics of certified and uncertified farms is quite genius in my opinions, even though since the scores are estimates of a probit regression. Nonetheless, being able to control for other characteristics and to match similar characteristics is a great step to establish the true counterfactual to measure the effects of the dependent variable more efficiently. I think this model should be suggested further for other similar projects.

I also find it very interesting that only the negative practices are significantly reduced by the incorporation of eco-certificates, while only 1 out of five good practices shows some moderately significant effect. The authors somewhat attributed the differences due to the different practices in monitoring. If monitoring has such a large influence on the outcomes of various management techniques, it should be a variable to be included in the regression model. Also, there is no incorporation of differences in monitoring cost across these certified and uncertified farms.

Last but not least, the discussion on endogeneity is a bit unconvincing. Although the Rosenbaum bounds test for the critical value of gamma-star shows that gamma-star needs to be very large for ATT to no longer be significant at 10 percent level, the authors weren't able to convincingly dispute a potential reverse-causality between grower's decision to obtain organic certification and to (or not use) the encouraged production practices. In order to do so, the authors should have been able to produce theoretical framework for these underlying assumption. This assumption turns out to be quite critical in this particular study, however.

How can a hypothetical counterfactual be the basis to test causal impacts in studies based off of empirical evidence? If the validity of a study depends solely on the construction of a hypothetical counterfactual, then the fictional outcome of the counterfactual takes away from the evidence provided by the empirical data. For studies to truly determine the environmental and socioeconomic impact of certification, only empirical evidence should be used.